Individual investors continue to buy declines in ETFs

Amateur traders have led a record pace of inflows into exchange-traded funds this year, suggesting that in addition to their remarkable forays into quirky individual stocks, they are also playing a role in dampening broader declines in indexes.

US-listed equity ETFs, which typically allow investors to acquire or dispose of exposure to a basket of stocks, attracted $249 billion in 2020. But so far this year, they have attracted $305 billion — largely from retail investors, according to CFRA Research Corporation.

“Investors do not panic when a sell-off occurs, and most of the new money that is being released is for the broad market ETFs that are the building blocks of portfolios,” said Todd Rosenbluth, CFRA’s head of CFRA mutual fund research.

ETF flows help explain the limited declines in US stock indices since last November. Typically, a 5 percent drop in the stock market occurs three times a year, but no decline has occurred in the past seven months. Bank of America also notes that the past 15 months haven’t brought a single 10 percent correction to the S&P 500, usually an event that goes up at least once a year.

“When there is an immediate drop in stocks, retailers immediately come in to buy the dip,” said Eric Liu, analyst at Vanda Research. “People are dropping out of ETFs as a way to buy dip. Lately, retailers have been buying more ETFs than any other segment of the population.”

Investment advisors and brokerages have bolstered flows into ETFs, with retail investors accounting for 70 percent of sectoral inflows so far this year, analysts at JPMorgan said in a research note. “The influx of ETFs represents a wall of money supporting every slump in stock markets so far this year,” the bank said, and “the bigger the drop, the bigger the influx of ETFs.”

The question is whether this uptrend will continue when tested. The markets rebounded strongly, and now they are standing at record price levels and high valuations. In the coming months, inflation concerns are likely to intensify alongside pressures on businesses from rising wage and input costs.

Signals from the Federal Reserve that it may reduce the pace of bond buying present another challenge to asset prices that have rebounded as investors exit debt markets, as low interest rates erode the yield paid on bonds.

Retail money market funds You still have plenty of ammunition to buy any larger stock price dips, with holdings at all-time highs above $1 trillion. This money basically earns no interest, and provides a great source of dry powder.

said Nicholas Colas, co-founder of research firm DataTrek.

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